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Deal or no deal: 6 undervalued dividend stocks trading below their Graham number

By: Kapitall
Posted: 6/5/2014 10:06:00 AM
Referenced Stocks:

By James Dennin for Kapitall.

Stocks didn't move much on Tuesday, which is a pretty good sign seeing as both the S&P 500 and the Dow Jones Industrial neared record highs.

The general analyst concensus seems to be that most investors are waiting on May's employment report, and news on Europe's stimulus plan before making any big changes. 

Stocks were also supported by more merger and acquisition rumors, particularly concerning the food industry as bidders continue to line up for Hillshire Brands ( HSH ) , the maker of Jimmy Dean Sausages. 

Dividend stocks have had a tepid year , to say the least. They've underperformed the stock market as a whole in 2014-a far cry from the days of 2012 when investors flocked to them as a way to get better returns. 

In the event that dividend stocks have underperformed enough to become attractive again, we decided to see if we could find any that were trading at a discount. So we started off with a universe of over 400 dividend-paying US stocks.

We then screened those companies for stocks trading at a heavy discount to their Graham Number, a figure derived by Benjamin Graham which tries to asses a fair price for a stock based on its earnings and book value. 

This left us with about 20 companies on the list. However, most of them were in financial services, which is often the case at the moment. So we screened out the companies working there to round out the list to just 6 names. 

Do you think they are undervalued? Use the list below to begin your analysis and let us know what you think in the comments. 

Click on the interactive chart to view data over time. 

1. AGCO Corporation ( AGCO , Earnings , Analysts , Financials ): Distributes agricultural equipment and related replacement parts worldwide. Market cap at $5.07B, most recent closing price at $53.96.  

Diluted TTM earnings per share at 5.86, and a MRQ book value per share value at 40.92, implies a Graham Number fair value = sqrt(22.5*5.86*40.92) = $73.45.

Based on the stock's price at $53.96, this implies a potential upside of 36.12% from current levels.  

2. Barnes Group Inc. ( B , Earnings , Analysts , Financials ): Operates as an international logistical services company, and aerospace and industrial components manufacturer in the United States, Belgium, Brazil, Canada, China, Denmark, France, Germany, Holland, Italy, Korea, Mexico, Singapore, Spain, Sweden, Switzerland, Thailand, and the United Kingdom. Market cap at $2.03B, most recent closing price at $37.38.  

Diluted TTM earnings per share at 5.08, and a MRQ book value per share value at 21.23, implies a Graham Number fair value = sqrt(22.5*5.08*21.23) = $49.26.

Based on the stock's price at $37.38, this implies a potential upside of 31.78% from current levels.  

3. Dean Foods Company ( DF , Earnings , Analysts , Financials ): Operates as a food and beverage company in the United States. Market cap at $1.62B, most recent closing price at $17.38.  

Diluted TTM earnings per share at 3.27, and a MRQ book value per share value at 7.24, implies a Graham Number fair value = sqrt(22.5*3.27*7.24) = $23.08.

Based on the stock's price at $17.38, this implies a potential upside of 32.8% from current levels.  

4. Entravision Communications Corporation ( EVC , Earnings , Analysts , Financials ): Operates as a diversified Spanish-language media company. Market cap at $478.38M, most recent closing price at $5.36.  

Diluted TTM earnings per share at 1.54, and a MRQ book value per share value at 1.57, implies a Graham Number fair value = sqrt(22.5*1.54*1.57) = $7.38.

Based on the stock's price at $5.36, this implies a potential upside of 37.61% from current levels.  

5. Federal Signal Corp. ( FSS , Earnings , Analysts , Financials ): Designs and manufactures a suite of products and integrated solutions for municipal, governmental, industrial, and commercial customers worldwide. Market cap at $862.71M, most recent closing price at $13.72.  

Diluted TTM earnings per share at 2.64, and a MRQ book value per share value at 5.73, implies a Graham Number fair value = sqrt(22.5*2.64*5.73) = $18.45.

Based on the stock's price at $13.72, this implies a potential upside of 34.47% from current levels.  

6. MeadWestvaco Corporation ( MWV , Earnings , Analysts , Financials ): Provides packaging solutions to the healthcare, personal care and beauty, food, beverage, home and garden, tobacco, and commercial print industries worldwide. Market cap at $6.81B, most recent closing price at $40.58.  

Diluted TTM earnings per share at 4.79, and a MRQ book value per share value at 20.86, implies a Graham Number fair value = sqrt(22.5*4.79*20.86) = $47.42.

Based on the stock's price at $40.58, this implies a potential upside of 16.84% from current levels.  

(List compiled by James Dennin. Dividend yields sourced from Zacks Investment Research, Graham Numbers sourced from Google Finance. All other data sourced from Finviz.)

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